Abstract
International statistics show that small firms are the dominant form of business enterprise today. Yet, despite ongoing research into the theory of the firm, there is still no common view on the mechanisms of firm growth. This article aims to stimulate further theoretical and empirical research into firm growth. In the first part of the paper, the author reviews the most seminal theories of the growth of the firm to date, noting that there are two broadly perceived schools of thought within the analysed field. The first approach advocates a more or less stochastic pattern of firm growth. The second research school holds that the resources at the firm’s disposal are the differentiators, drivers of, but also limits to, firm growth. In the second part of the paper, based on the literature review and deduction, the author develops an alternative model of firm growth. Building on the properties of the Markovian processes, he shows that it may be because of the seemingly rational behaviour of firm incumbents that most firms do not grow in size beyond some satisfying level. The proposed model of firm growth is equally applicable to firms of all sizes operating in all industries and markets.
Highlights
Problems related to firm size and growth, especially its drivers and boundaries, have long been of interest to economists and other scholars working in the field of organisational theory
We aim to contribute to the debate on the observable firm size distribution and the lack of firm growth, firstly by reviewing the most seminal models of firm growth to date, and secondly by suggesting an alternative model of firm growth. We show that it may be a seemingly rational behaviour of a value-maximising agent not to let his firm grow in size
Based on their findings we have developed a new formal model illustrating why a boundedly rational agent may not let his firm grow in size
Summary
Problems related to firm size and growth, especially its drivers and boundaries, have long been of interest to economists and other scholars working in the field of organisational theory. Let g1 be the largest economically feasible size of a firm of the analysed type at a given point in time, determined by the external environment of the firm All these assumptions, as depicted, allow us to trace the growth of the firm as a function of its organisational resources. Given that the organisational resources function is unique to each and single firm, two firms being at the same stage of development and operating in the same industry, under exactly the same external conditions, might grow to different sizes. It is envisaged that the transition probabilities would first need to be approximated based on real-life observations
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